Beginner’s guide to invest in Cryptocurrency
What is a cryptocurrency?
When you hear about cryptocurrency at first, it might sound complicated and complex. However, in reality it is actually quite simple. It can be classified as a digital asset or token that is created to be exchanged on platforms that function on blockchain technology or cryptography. The buzz around cryptocurrency was created by Bitcoin that originated in 2009. However, apart from Bitcoin, there are at least a thousand more types of cryptocurrencies out of which around two dozen are most actively used.
For a blockchain to operate properly, the transactions have to be verified and validated at each step. This work is done by “miners”, they modify their computer system to validate each transaction at every step by resolving complicated mathematical problems. This work was initially done by cryptography enthusiasts, as a reward they earn cryptocurrency for themselves. This is an advantageous opportunity to generate revenue, an entire business model is set up around this idea by supplying tools and training to people to get started as a miner. Commercial enterprises have been set up through pooling of resources by individuals in an attempt to invest in the necessary resources to capitalize on it.
How does cryptocurrency function?
Just like any other type of currency, the supply of cryptocurrency is limited, it accumulates value and has a determined exchange rate. Although, it works without any administrators and is decentralized. For verifications in order to make transfers, it relies on encryption technology instead. This indicates that there is no regulatory or central authority that oversees the usage and production of cryptocurrency.
To substitute the functions of a regulatory authority, a peer-to-peer network is established that permits users to make transactions. In order to authenticate new transactions and create a log of past transactions, public ledgers and shared private keys are used. This form of authentication was first introduced and adapted by Bitcoin, it incentivizes users to participate by rewarding them with additional coins.
To get started trading with cryptocurrencies, whether you’re an individual or a business, you must procure a cryptocurrency wallet account. These wallets function just like any bank account that you are acquainted with but are particularly used for transacting in cryptocurrencies. However, before deciding which wallet to go for you must do a thorough research. Most likely, cryptocurrency coins have official wallets of their own or recommend reliable third-party wallets.
Subsequent to acquiring a wallet, cryptocurrencies can be bought from public exchanges and can be utilized for a diversity of transactions. These coins can also be converted to cash in the future.
Benefits of investing in Cryptocurrency
Cryptocurrencies come with its own set of risks. However, the benefits outweigh the risks. It is a new approach to transactions and it has the potential to be beneficial for every domain and industry. The following are the main benefits of investing in cryptocurrency:
Cryptocurrencies are great for international payments as they are not affected by exchange rates. It has a practical value as it is simpler and often much less expensive.
2. Little or no processing fee
Unlike the commonly accepted forms of payments like debit or credit cards, cryptocurrencies often have very little to no processing fees. This is made possible by blockchain technology. The transactions can be created, recorded, verified and enforced without a regulatory authority.
3. High speed transaction
As opposed to commonly accepted forms of payment which might take upto 2–3 business days to be processed, a cryptocurrency transaction takes less than 10 minutes to be processed. Added to that, cryptocurrency transactions are final, sales cannot be negated, consumers can’t dispute a charge.
4. Increased payment option
It has potential to attract a greater number and variety of customers for business. As increasing payment options can provide a better reach.
5. Security and transparency
Cryptocurrency transactions are peer-to-peer which means there is no involvement of a third party. This gives you more control over your assets and you do not have to worry about losing any money for the third party’s fault. Another advantage of cryptocurrency is that it cannot be counterfeited.
Transparency is another major advantage of digital currency. All the transactions can be tracked so you know exactly where your money is going.Finally, personal information is not needed for carrying out a transaction, they are way more anonymous than traditional currencies.
6. True ownership
In the absence of an intermediary, you are the sole owner of your funds. As opposed to traditional intermediaries like banks where once you deposit your money, you do not have full control over it. This ownership comes with more responsibility as well as freedom.
There are thousands of types of cryptocurrencies, so consumers have a wide range to choose from. Digital currencies are not tied to any geographical location and can be used anywhere in the world. Furthermore, each coin is made for specific and predetermined purposes, that means it has a wide variety of applications. They can be used beyond just making transactions.
For example, there are specific innovations that back up certain coins. They can be used to upgrade how to deal with documentations, they can also be used to help developers etc.
Risks of investing in Cryptocurrency
Cryptocurrency has the potential to provide high returns but is also highly volatile and has security issues. While choosing a cryptocurrency exchange, it is advised to do a thorough research as they are not closely regulated. The following are the main risks that are involved in investing in cryptocurrency:
- Price volatility
The value of cryptocurrencies can increase and decrease rapidly over a short span of time. For example, in January 2018, the value of Bitcoin reached $17,000 and fell to $7,000 the next month.
2. Cyber security
Digital securities exist in the digital space exclusively. The proof of ownership is also limited to the private key system which is used to validate transactions. The fact that it only exists virtually makes it prone to be attacked by hackers. It is a major concern as digital currency is new and emerging, even the businesses that are using it do not have sufficient knowledge to protect it.
3. Unregulated and unbacked
Cryptocurrencies are created by the private sector and are not regulated or controlled by any central authority. It is susceptible to be targeted by cyber criminals and incautious consumers can get scammed easily.
4. Inadequate store of value & restricted acceptance
Cryptocurrencies can be exchanged for real goods and services, however, the options to do this remain very restricted and limited. For the same reason, volatility is an inherent characteristic of cryptocurrency which makes it a poor store of value. If one tries to convert it back to their base currency, the value of crypto currency will vary widely even intraday.
5. Potential unlimited supply
It is true that most crypto currencies have a cap to which they limit their production. However, there are no regulations that can stop an emerging number of cryptocurrencies from being created. Therefore, the potential supply for digital currencies is unlimited.
It is also to be noted that many central banks are progressing towards the idea of launching their own digital currency. This may be detrimental to private issued digital currencies.
Are crypto currencies legal in the EU?
After weighing the pros and cons, it is imperative to understand the legal implications of participating in cryptocurrency investments. To begin with, the legality vastly varies across different countries.
Cryptocurrencies in general are considered legal in EU member states. However, regulation of cryptocurrency exchanges may vary from state to state. The taxation on cryptocurrency can also vary depending on the member state. A capital gain tax ranging from 0–50% can be levied by the member state. The European Court of Justice in 2015 ruled that exchanges of traditional currency for digital currency accounts for supply of services but shall be exempted from VAT. The judgement can be found here.
The European Commission has proposed a regulation named Regulation on Markets in Crypto Assets (MiCA). The proposal can be accessed here. This regulation is expected to form a part of the EU’s Digital Finance Strategy and presumably have significant impact on the operations of cryptocurrency in the EU market. The Digital Financial Strategy can be accessed here.
Conclusion and Suggestions
Investment is a personal choice, however, diversification of portfolio is always a good idea for anyone interested in investing. We believe that usage of cryptocurrency will be widespread in the near future, if you believe the same then it might be a good time for you to invest in some cryptocurrency and diversify your portfolio. However, make sure that any cryptocurrency you invest in, you should have an investment thesis as to why it will withstand the test of time.
Nevertheless, if investing in cryptocurrency feels too unsafe, you may evaluate other approaches from the rise of cryptocurrencies. You can consider buying stocks of companies such as Coinbase, Paypal or Square. Investing in an exchange like CME Group that facilitates crypto trading. Investing in these companies may be advantageous, they do not have the same perks as investing in cryptocurrency directly.
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